1. MRP and Related Concepts
TLA (Three Letter Acronym) Definitions
ATP: Available to Promise
BOM: Bill of Materials
DRP: Distribution Requirements Planning
MPS: Master Production Schedule
MRP: Materials Requirements Planning
PAC: Production Activity Control
SOP: Sales and Operations Planning

2. Where Does MRP Fit?

3. Master Scheduling I
Controls the timing and quantity of production for products or product families
Primary interface point for actual customer orders
Coordinates forecasted demand and actual orders with production activity
Serves as tool for agreement between marketing and operations (but at a different level than SOP)

4. Master Scheduling II Feeds more detailed material planning
Indicates the quantity and timing (i.e., delivery times) for a product or group of products
More detailed than SOP
weekly versus monthly
specific products versus “average”
must satisfy the needs of marketing
must be feasible for operations

5. Link between SOP and MPS
Month: January February March
Output:
SOP
January (weeks)
Push Mowers
Self-propelled
Riding
MPS

6. MPS Formulas: Definitions
ATPt = Available to promise in period t
EIt = Ending Inventory for period t (same as projected on-hand inventory for next period)
Ft = Forecasted demand for period t
MPSt = MPS quantity available in period t
OBt = orders booked for period t

7. MPS Formulas:

8. Detailed MPS for Widgets
On-hand inventory at end of October =
100
Month
November
December
Week 45 46 47 48 49 50 51 52
Forecast Demand
150
125
Orders Booked
170
165
140
120 85 20
Master Schedule
300
250
Notes:
Planning time fence  cumulative lead time for product
What seems to be the lot-sizing rule here?

9. Projected On-Hand Inventory
On-hand inventory at end of October =
100
Month
November
December
Week 45 46 47 48 49 50 51 52
Forecast Demand
150
125
Orders Booked
170
165
140
120 85 20
Projected On-Hand Inventory
230 65
215
190
Master Schedule
300
250
i.e. Projected on-hand inventory for week 47: = – 150 = 215

10. Available-to-Promise
On-hand inventory at end of October =
100
Month
November
December
Week 45 46 47 48 49 50 51 52
Forecast Demand
150
125
Orders Booked
170
165
140
120 85 20
Projected On-Hand Inventory
230 65
215
190
Master schedule
300
250
Available-to-Promise 40 70
120
ATP(45) = – ( ) = 65
ATP(47) = 300 – ( ) = 40
ATP(49) = 250 – ( ) = 120

11. Change in Forecast Demand
On-hand inventory at end of October =
100
Month
November
December
Week 45 46 47 48 49 50 51 52
Forecast Demand
150
Orders Booked
170
165
140
120 85 20
Projected On-Hand Inventory
230 65
215 15
115
(35)
Master schedule
300
250
Available-to-Promise 40
Are we in trouble yet?

12. Change in Orders Booked
On-hand inventory at end of October =
100
Month
November
December
Week 45 46 47 48 49 50 51 52
Forecast Demand
150
125
Orders Booked
170
230
140
120 85 20
Projected On-Hand Inventory
Master schedule
300
250
Available-to-Promise 40
Note impact of ATP(45) and on-hand inventory projections

13. Key Points about MPS Provides more detail than SOP
Tracks the following information:
Actual versus forecasted demand
Available-to-Promise
This gives sales information for accepting or not accepting new orders for delivery in a given week

14. A Final View of Master Scheduling
SOP
Marketing
Operations
MPS
Rough-Cut Capacity Plan

15. Material Requirements Planning
MRP in the planning cycle
The logic of MRP
an extended example
Considerations of MRP

16. Assume that we’ve scheduled 500 chairs to be ready five weeks from now.
what?

17. Material Needed for a Chair
Back supports (3)
Side rails (2)
Front legs (2)
Cross bars (2)
Seat

18. Chair Structure Tree (aka “Bill of Materials”)
Leg
Assembly
Seat
Back Assembly
Legs (2)
Cross
bar
Side
rails (2)
Back
Supports (3)

19. Graphic Lead-Time Week 1 Week 2 Week 3 Week 4 Week 5
Back Support (2 weeks)
Side Rails (2 weeks)
Back
Assembly
Cross Bar (2 weeks)
(1 week)
Chair
Assembly
Seats (2 weeks)
(1 week)
Leg
Assembly
Legs (2 weeks)
Cross Bar (2 weeks)
(1 week)

20. Lead-Time Key Points
To have finished chairs at the beginning of Week 5, we must begin production and order materials in Week 1.
“Exploding” the bill of materials tells us when to order things.
Not much we can do to adjust output of chairs for the next 4 weeks. Why?

21. Material Requirements Planning (MRP)
We need the following inputs:
Bill-of-Materials (BOM)
Inventory records
Master production schedule
We’ll get the following outputs:
What items should be ordered
When each item should be ordered
How much of each should be ordered

22. The MRP Process Starts with the MPS
End items are also known as “Level 0” items

23. The “Parent / Child” Relationship
Refer back to bill of materials on slide 20, or insert duplicate after this slide for ready reference
Where do the gross requirements come from?
Do you understand the MRP logic?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

24. Going Deeper… 25 25 25

25. Moving from “Level 1” items to “Level 2” items . . .25 25 25
Where do the gross requirements for LEGS come from?

26. Combining Requirements: “Cross Bars”25 25 25
Note effect of differences in lead times and order sizes on the gross requirements for each component

27. Impact of Longer Lead Times
We cannot do this since the planned order would be in the past…. Thus the 250 crossbars will be delivered late one week to back assembly. What does this do to our chair schedule? 25 25 25

28. Do You Understand ...
Why it is important to have an accurate BOM and accurate inventory information?
Why do we need to “freeze” production schedules?
Where do gross requirements come from?
The is the difference between planned and scheduled receipts?

29. Other Considerations I
MRP
Feedback
Feedback
Planned Orders
Production
Suppliers

30. Other Considerations II
When do we update the system?
Capacity requirements planning using MRP output
“Pegging”
Lot sizing issues

31. Recall ... 25 25 25
Look at the “lumpiness” of demand for legs

32. If we order “lot-for-lot”25 25 25
Much smoother demand for legs, lower average inventory

33. Distribution Requirements Planning (DRP)
Anticipates downstream demand
Uses this information, not predetermined reorder points or periodic reviews, to determine when to order
Computer-based software systems needed to deal with the added complexity
The key difference between DRP and the other methods is that DRP uses demand forecasts and knowledge about the participant’s inventory policies to determine when to place an order. DRP is more complex and usually requires a computer-based system, but is far better when demand levels are unpredictable.
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

34. DRP Example I
Suppose we forecast demand for Wholesaler A for the next 8 days (the best time horizon to use will depend on many factors)
Based on this, we anticipate that Wholesaler A will order on Day 3
As before, Wholesaler A has a reorder point of 50, and orders in quantities of The DRP record shows the forecasted demand for the next 8 days, the expected ending inventory level, and when Wholesaler A will expect to receive an order.
For example, the wholesaler starts Day 1 with 85 units and expects to sell 20, leaving it with 65 at the end of the day. Wholesaler A falls below its order point some time on Day 2. As a result, Wholesaler A places an order which it expects to receive on Day 3.
Based on the expected demand rate of 20 per day, Wholesaler A shouldn’t expect to receive another order over the remaining days showing in the record.
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

35. DRP Example II Combined, we expect to see orders on Days 3 and 4
Here, we have completed a similar DRP record for Wholesaler B, and added its expected orders to those of Wholesaler A to get a line titled “Total expected orders” for the next 8 days.
We extend the analysis to include Wholesaler B
Combined, we expect to see orders on Days 3 and 4
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

36. DRP Example III
Special notes:
Even though the orders cause the demand to look “lumpy”, DRP allows the distributor to anticipate when the orders are required, and to plan accordingly. In this case, the distributor will need to plan on receiving 400 units in Day 3 (Q = 400 for the distributor). If it takes 2 days to get units to the distributor from the factory, this means the distributor should plan on releasing the order on Day 1.
The distributor then uses this information to plan its own orders. In this case, suppose it takes two days for the supplier to replenish; based on the information, the distributor would order on Day 1
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

37. DRP Benefits Helps improve customer service
Provides a better and faster understanding of the impact of shortages and/or promotions
Helps reduce costs
Inventory
Freight
Production
Provides integration between the stages in the supply chain
“Reduced costs” deserves some more explanation. To the extent that the distributor could “see” when the wholesalers would require more product, the distributor could use that information to combine orders, plan production, or even combine freight shipments. The point is, with better information, the Distributor will have more choices on how to run its business.
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

38. DRP Constraints Accurate forecasts and inventory levels
Necessary to anticipate correctly when orders will be placed
Consistent and reliable lead times
To ensure that orders can be placed and arrive by the time they are needed
“Nervousness”
Even slight changes in demand for downstream partners can have a significant impact on order volumes, especially when order sizes are relatively high
“Nervousness” is a concept discussed in more detail in Module 12. “Nervousness” refers to the idea that slight changes in demand at the Wholesaler level may dramatically affect when they place orders.
Look again at Wholesaler A. If demand turns out to be just 14 units in Day 2, then the reorder point wouldn’t be reached until Day 3. The result would be that Wholesaler A would not expect to receive more units until Day 4. The “nervousness” in this case is that a relatively small change in demand ( = 6 units) shifted an order for 200 units.
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield